NPIFF - Northland Power: Navigating Clean Energy Landscape With A Focus On Offshore Wind And Diversified Portfolio

Summary

• NPI is a leading clean energy company with a focus on offshore wind, solar, and regulated energy supply.
• NPI has a global growth pipeline, with a prominent position in the offshore wind industry, and is looking to expand its growth opportunities globally.
• The company has a well-structured capital allocation plan and has made strategic investment decisions in the offshore wind market.
• At a current estimated value of $31 CAD per share, I do not recommend purchasing shares as they are fairly valued. However, I would keep an eye on the market for an interesting entry point.
• Key risks and challenges faced by NPI include asset concentration, power prices, and foreign exchange exposure.

Northland Power Inc ( NPI:CA ) is focused on building and managing sustainable infrastructure assets using clean technologies such as wind (both offshore and onshore), solar, and regulated energy supply. NPI primarily relies on offshore wind energy and is looking to expand its growth opportunities globally across North America, Europe, Latin America, and Asia.

I have updated my valuation based on the Investor Day presentation updated on February 3. The valuation adjustment of NPI is primarily driven by the increased costs of its offshore wind projects.

NPI's focus on controlled growth follows the reduction in returns on some of its offshore wind initiatives. NPI has estimated a 20-30% rise in project costs for its near-term projects (Hai Long, Baltic Power, and Nordsee Cluster), with some offsetting factors.

However, the rapid increase in project costs and higher interest rates are putting offshore wind developers at risk due to long development periods. Despite this, Northland is seen as a strategic developer, as demonstrated by its decision not to participate in US offshore wind auctions. NPI's 2023 adjusted EBITDA guidance of $1.2-$1.3 billion is below expectations, due to growth investments and expected power price increase.

In December, NPI announced a plan to sell down its interest in the Hai Long project, with plans to do so for other projects in the future, to fund its capital investment plan. NPI has identified growth potential in energy storage and green hydrogen, including a 250 MW storage project in Ontario and early-stage green hydrogen opportunities in Canada.

A Pioneer in Clean Energy with a Focus on Offshore Wind and Diversified Portfolio

NPI is a leading clean energy producer that specializes in developing, owning, and operating clean energy infrastructure assets globally. NPI underwent significant changes in strategy following the appointment of Mike Crawley as CEO in 2018. Initially, NPI was primarily focused on clean energy assets in Canada, but under Crawley's leadership, NPI has expanded globally with a focus on offshore wind energy. NPI has a prominent position in the offshore wind industry and expects this to remain the backbone of its investment strategy. Currently, NPI's portfolio is primarily focused on three operating projects in the North Sea, but it has a diversified growth pipeline in Asia, Poland, and additional North Sea projects.

NPI's success in being an early adopter of offshore wind highlights its strong development capabilities, despite its smaller scale compared to its peers. However, the long development timeline for offshore wind projects leads to inconsistent cash flow generation for NPI. To mitigate this, NPI has pursued shorter-cycle investment opportunities in onshore renewables and acquired Spanish wind and solar assets in 2021 to strengthen its presence in onshore renewables. The acquisition of a Colombian electric utility in 2020 has also added a regulated utility asset to NPI's portfolio, providing a source of perpetual cash flow to complement its offshore wind portfolio.

NPI's Standing in the Renewable Energy Industry: Offshore Wind Dominance with Competition and Uncertainty

NPI ranks among the top 10 largest offshore wind capacity owners globally and primarily generates revenue from this sector. However, NPI faces competition from bigger industry players, and its smaller size and shorter contract lengths limit its potential edge. NPI's offshore wind projects have agreements with government entities that secure near-term returns, but there is still uncertainty beyond the contract period. NPI's onshore renewables segment lacks a competitive advantage due to low entry barriers. Conversely, NPI's natural gas segment has a competitive advantage based on its favorable contract profile and intangible asset benefits. The utility segment has a limited moat due to its regulated operations and exclusive franchise rights in the Boyaca region of Colombia.

Strong Capital Allocation Strategy

NPI has a well-structured capital allocation plan, with a robust balance sheet, and impressive investment performance. The company mainly relies on project-level debt financing, which has resulted in an investment-grade credit rating and showcases its strong financial position. Under CEO Mike Crawley's leadership since 2018, NPI has made strategic investment decisions, particularly in the offshore wind market, by acquiring early-stage projects and becoming a first-mover in the industry. The company focuses on markets that play to its strengths and avoids high-cost markets, such as the U.S. offshore wind sector.

Valuation

My fair value estimate for Northland stands at $31 CAD per share. The slight revenue growth in the medium term is driven by the offshore wind and onshore renewables segments. Offshore wind performance is expected to recover from recent below-average levels. Key factors that will impact margins include long-term power prices, especially in Northern Europe as high-priced contracts expire in 2028-2032, and the returns on the offshore wind projects set to come online in 2026-2027, given the significant capital investment.

The target value of $31 implies slightly lower multiples than historicals as summarized below.

Key Risks and Challenges: Asset Concentration, Power Prices, FX Exposure

The primary challenges faced by NPI include asset concentration, fluctuations in interest rates and long-term power prices, and exposure to foreign exchange risks. NPI's offshore wind portfolio is heavily reliant on a few projects, with three of them accounting for about 50% of the expected adjusted EBITDA. This increases the risk of a single asset having a significant impact on NPI's cash flow. The company is also exposed to changes in long-term power prices and interest rates, as it has long-duration power generation assets. Although its near-term cash flow is protected by power purchase agreements, the average expiration of its offshore wind contracts is within the next decade. NPI is also susceptible to foreign exchange risks, as a majority of its revenue is in euros and less than 30% of its cash flow comes from Canadian operations. The company mitigates this risk through foreign currency hedge contracts. The company's offshore wind portfolio is limited in size and has shorter-term contracts, making it vulnerable to increased competition in the renewable energy sector, which could lead to return compression. Additionally, NPI is a smaller player in the offshore wind industry compared to its peers.

Conclusion

NPI is a top clean energy producer focusing on offshore wind and a diverse portfolio. Despite facing challenges like asset concentration, power prices, and FX exposure, NPI has a strong capital allocation and well-structured balance sheet, allowing it to keep an investment-grade credit rating. Under the leadership of CEO Mike Crawley, NPI has made strategic investments such as acquiring early-stage projects, expanding globally, and diversifying its portfolio through onshore renewables and regulated utility assets.

Overall, NPI is a solid company with potential for growth. To reach its full potential and overcome challenges, NPI must maintain its investment strategy and make smart investments, continuing to diversify its portfolio. At a current estimated value of $31 CAD per share, I do not recommend purchasing shares as they are fairly valued. However, I would keep an eye on the market for an interesting entry point.

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